索尼 (SONY) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Sony Corporation fourth quarter fiscal year 2004 conference call. (OPERATOR INSTRUCTIONS] The conference will now begin.

Thank you very much for that introduction. Thank you all for joining us today April 27, 2005 for the discussion of Sony's results of the fiscal year ending March 31, 2005. I am Jonathan Bates with Sony Investor Relations in Tokyo. We are joined this evening in Tokyo by Takao Yuhara, Senior Vice President, Corporate Executive Officer in charge of Finance and Investor Relations. And by Mr. Rob Wiesenthal, CFO of Sony Corporation of America. In addition, I am sorry to have to report that Katsumi Ihara, Executive Deputy President, Corporate Executive Officer, Group CSO and CFO will not be able to join us for today's call. First of all, I would like to have Mr. Yuhara and Mr. Wiesenthal say a few words of welcome to our guests.

This is Yuhara. Thank you very much for you to join this conference call. I'm also joined to this -- the conference. Thank you.

Good morning it's Rob Wiesenthal calling from Tokyo and I look forward to taking your questions about the entertainment business.

Thank you very much for joining us today. In just a few moments I'm going to give you a brief summary of today's announcements. Then Mr. Yuhara and Mr. Wiesenthal will be available to answer your questions.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, and release and other statements, that are not historical facts are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions and at least in light of the information currently available to us, and therefore we should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual result to differ materially from those discussed in the forward-looking statements. For additional information as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release. Which can be accessed by choosing investor relations at the bottom of the page at WWW.Sony.com.

With that, I'm going to turn to our announcements. Announcement of Sony's results for the fiscal year ending March 31, 2005. Consolidated sales decreased 4% or 336.8 billion Yen, year on year. This was primarily due to the transfer of our overseas recorded music business to the equity affiliate Sony BMG and the appreciation of the Yen. Consolidated operating income increased 15% year on year on a Yen basis and 26% year on year on a local currency basis. The pictures segment recorded record-breaking operating income due to the success of Spider-Man 2 and strong home entertainment sales. Profitability in the music segment improved and the financial services segment performed well. The game segment experienced a decrease in sales and operating income. And the electronics segment recorded a larger operating loss than the previous year.

Although we decreased fixed costs in the electronics segment via restructuring, intense pricing competition negatively affected our performance. Restructuring expenses, which are included as operating expenses in the calculation of operating income, were 90 billion Yen, a decrease of 78.1 billion Yen versus the previous fiscal year.

Net income increased 85% year on year. There were two primary reasons for this large increase. Firstly, the effective tax rates declined to 10.2% from the 36.6% recorded in the previous year. A reversal of valuation allowances on deferred tax assets at Sony's U.S. subsidiaries resulting from an actual and anticipated improvement in operating performance, led to a reduction in tax expense. Secondly, equity in net income of affiliates improved 27.3 billion Yen versus the previous year. Sony recorded 17.4 billion Yen in equity income from Sony Ericsson, an increase of 11 billion Yen year on year. Sony Ericsson sold a record number of hand sets, more than 43 million, proving the strength of its product lineup. Sony also recorded a 12.6 billion Yen in income from -- in equity income from InterTrust Technologies Corporation, which recorded a gain from the settlement of a patent-related lawsuit. As a result, diluted earnings per share were 158.07 Yen, an increase of 81.7%.

Let me now quickly review the actual results for each segment for the fiscal year ended March 31, 2005. Electronics sales were flat versus the previous fiscal year, but operating loss increased 27.5 billion Yen. Although restructuring expenses for the segment decreased 66 billion Yen and we generated 82.7 billion Yen in savings from reduced fixed costs, a 15 billion Yen negative impact from the appreciation of the Yen, a 55.8 billion Yen increase in depreciation expenses and a 104.4 billion Yen deterioration in variable costs resulted in the increase in operating loss.

Audio, video, TV, and information and communications category sales in aggregate were 3 trillion 367.1 billion yen, a decrease of 1%, while operating income of these categories together was 20.5 billion yen, an 81% decrease versus the previous fiscal year. Sales of CRT TVs, due to the shift in the market to flat panel TVs and portable audio sales due to a shift in the market, decreased. On the other hand, sales of flat panel TVs, which saw an increase in unit sales in every region, sales of digital still cameras, which saw an increase in sales outside of Japan and LCD projection TVs, which saw an increase in unit sales primarily in the U.S., increased. Operating income of the AVIT categories decreased as a result of the decreased CRT TV and portable audio sales and a decline in the selling price of camcorders. VAIO profitability increased due to improvements in operations and concentration on high-value added models.

The products we introduced to the rapidly expanding flat panel TV and DVD recorder markets at the end of the last calendar year have sold well, and the Happy VEGA series of LCD TVs we put on sale in Japan in February is selling well and profitability in the LCD business is improving. In the portable audio space, CD and MD walkman sales have decreased. In response, we have expanded our lineup of hard disk and flash-based devices, introducing a flash-based product in Japan in April that has recorded very positive sales, being the top selling flash memory player for its first week of release.

Sales of the semiconductor and component categories in aggregate were 1 trillion 334.3 billion yen, an increase of 5% year on year. This increase was primarily due to an increase in intersegment sales of semiconductors to the game business.

Operating performance deteriorated 59.5 billion yen, resulting in the recording of an operating loss of 6.8 billion yen due to an increase in research and development expenses for the next generation processor, and increasingly intense pricing pressure in the DVD optical pickup and DVD PC drive business. Sales in the game segment decreased 7%. Approximately half of the segment's sales were generated by hardware and accessories combined. These two items accounted for 60% of sales in the previous year. Sales of hardware decreased year on year due to the decrease in PS2 unit sales and strategic price reductions. Sales of software increased due to an increase in PS2 software unit sales and absolute revenue. Sales of PS2 units continued to be strong, with the number of production shipments for PS2 software reaching a record for the year.

The in-house ratio for the year was basically unchanged at 15% for the year compared to 14% for last year. Grand Tourismo 4, which went on sale in the second of the year shipped more than 6 million units. Play Station Portable has gotten off to a great start, going on sale in Japan in December and in the U.S. in March. Hardware production shipments at the end of March were 2.97 million units and software production shipments were 5.70 million units. 1.44 million units of the hardware have been produced for the Japanese market with 1.53 million units produced for the North American market. More than 30 titles were on sale at the end of March in Japan and more than 20 were on sale in the U.S. We plan to bring the Play Station Portable to Korea, Taiwan, and Hong Kong in May and Europe in September.

Operating income in the game segment decreased 36% because, although software continued to perform well, the decrease in unit sales of PS2 hardware, the effect of the strategic price reductions and start-up costs associated with the Play Station Portable put downward pressure on earnings. Our production shipment forecast for the fiscal year ending March 31, 2006, for PS2 is 12 million units, for Play Station Portable, 12 million units and for all software, 250 million units.

The music segment's sales decreased due to the transfer of the U.S. based recorded music business to the Sony BMG joint venture on August 1, 2004. Operating income for the segment improved due to an increase in sales and an improvement in the cost of sales ratio at Sony Music Entertainment Japan. Sony BMG recorded $3.258 billion in sales, $290 million in restructuring expenses, $53 million in loss before income taxes and $66 million in net loss for the period since its establishment last August to the end of March 2005.

Sales in the pictures segment decreased 3% on a yen basis, but increased 1% on a dollar basis. This is the third period in a row in which Sony pictures has recorded record sales on a dollar basis. Not only was Spider-Man 2 a hit, but worldwide home entertainment and international syndication sales of prior year releases, such as 50 First Dates and Big Fish as well as theatrical releases such as Hitch contributed to revenue. SPE's market share for the 2004 calendar year was number 1 at 14%. Operating income of the pictures segment set a record for the fiscal year, increasing 80% over the previous year. Although the television business had a decrease in profit due to difficult comparisons with the previous year, earnings from the current year's film slate and home entertainment and syndication performance of prior year films led to the increase in operating income.

Finally, the financial services segment experienced a 6% decrease in revenue due to a decline in revenue at Sony Life, which accounted for approximately 85% of the segment's revenues. Sony Life's revenue decreased due to a change in the method for recognizing insurance premium revenue. If we were to exclude this effect, revenue was basically flat. Operating income of the segment increased 300 million yen to 55.5 billion yen. Due to a decrease in valuation gains on investments, operating income at Sony Life decreased 3% to 61 billion yen.

With that I would like to move to our forecast for the fiscal year ending March 31, 2006. We expect to record an increase in sales and operating income. The transfer of the substitutional portion i.e., the benefit obligation related to past employee service of Sony's employee pension fund, to the Japanese government is expected to enable us to record a gain of approximately 60 billion yen at the operating level and 35 billion yen at the net income level. Excluding this factor, consolidated operating income is expected to decrease year on year due to what we anticipate will be a severe operating environment.

Excluding the effect of the pension funds transfer gain, results on a segment wide basis are expected to be as follows. In the electronics segment, sales are expected to increase due to an increase in flat panel TV and LCD projection TV sales. Although this increase in sales and the benefits of reduced -- reduced fixed costs from our restructuring efforts will have a positive effect impact on profitability, continued pricing pressure and appreciation of the yen will likely offset this impact. We do, however, expect a reduction of restructuring charges year on year to lead to an improvement in operating profits.

Sales are expected to increase in the game segment. But operating income is expected to remain unchanged year on year. Sales are expected to grow as a result of the contribution of Play Station Portable. The contribution to profitability of PS2 and Play Station Portable will likely be offset, however, by increased research and development expenses for the next generation computer entertainment system. The pictures segment is expected to have an increase in sales due to an increase in theatrical and home entertainment sales, primarily resulting from an increase in films distributed, due to the acquisition of MGM. Operating income is expected to decrease, however, due to a difficult comparison with the previous year in which Spider-Man 2 was such a large contributor. Financial services and the other segments combined are expected to have a slight decrease in operating income. That concludes my opening remarks. With that I would like to turn you over to our operator.

[OPERATOR INSTRUCTIONS]

While we are waiting for the Q&A roster to be compiled, let's take a couple of e-mail questions. The first e-mail question is can you comment on total sell through of the PSP in North America to date and how these numbers compare to your expectations.

So I'd like to answer to this question of our Play Station Portables, as you know, we have launched the Play Station Portable in Japan in December last year, and also last month in the United States, and I believe they're both launching very well, both in hard and software. And also the sell through is moving very smoothly. And the other important thing is that we have launched over 30 titles of software in Japan and also more than 20 titles in North America – which is also accelerating the sell through. I cannot tell you exactly the quantity of sell through but the cumulative shipment quantity in Japan is 1.4 million units and North America is 1.5 million units.

Thank you very much, Mr. Yuhara. Our next e-mail question is an e-mail question for Rob. What's your guidance for margin declines in pictures and your restructuring costs for MGM? Press suggests Sony will rationalize 1,200 of MGM's 1,500 staff.

The rationalization of MGM obviously will include restructuring costs at MGM. Those however will not impact the Sony pictures segment. Sony manages its investment in MGM as a minority stake that is recognized on the equity income line. So that does not impact the pictures margin. Obviously with respect to the decline in pictures margin it had to do with difficult comparisons on the motion picture side, not having Spider-Man 2 as we did last year, a tremendously successful film in the absence of Seinfeld third cycle sales and other TV revenues that we had in the previous year. So there is no impact by MGM on our performance at Sony pictures with respect to margin and in fact, I'll add that we would expect some actual enhancement of profitability at pictures due to MGM in terms of the pickup of fees that we will be receiving for distributing MGM product as we move forward.

Thank you very much, Rob. With that I would like to go over to our first live question.

Your first question comes from the line of Mr. Conor O'Mara from Arete Research.

Hello, there. Two questions on guidance, if I may. The first relates to your 5 billion forecast for equity in net income. I was wondering, could you help me break that down in terms of the different associate lines because just a -- just looking through some clean numbers it looks quite low to me. I mean, SEMC did 18 billion last year. Sony BMG if you strip out the charge as is already doing a 7% margin and you've already taken 219 million of costs there and Samsung LCD is also ramping and everybody's quite optimistic about the LCD TV market in the second half of the year so I'm really wondering how you get to 5 billion under that scenario.

Okay, can I answer this question and, first, we had the one-time gain of the patent-related license over the InterTrust in the last year, and this year we do not have such a one-time gain from this company. And also MGM will start its operation and we anticipate the loss on the MGM operations. And also the S-LCD, that is newly started from, in this financial year for its production and we have anticipated loss because of set-up period. While, on the improvement side, Sony Ericsson Mobile Communications will anticipate more sales and more profit in this fiscal year. And also the Sony BMG, although we continue to have restructuring, we will see the profit contribution from the joint venture in this year. So those are the total outlook of the equity affiliate companies.

Would it be fair to say that basically most of the restructuring and investment has been made this fiscal year and then going into the year afterwards we should start seeing the benefits in the associates line?

Which company is that?

Well, Sony BMG, and Sony MGM and Sony -- and S-LCD, you're saying there's restructuring charges and there's investments so I'm just wondering what would profitability be on a clean basis going into the following year.

Yes, it's easier and we could make profit on the clean basis-- for the Sony BMG.

Right.

Thank you very much for your question. With that I would like to go to another e-mail question. The question is, that if -- if Sony, Toshiba, and other members of the Blu-ray and HD- DVD camp agree on a common standard, what's the implication for your DVD replication and movie businesses? And will Blu-ray still feature in the PS3?

Yes, Sony always considers what is best from the customers’ viewpoint. So, therefore, we are continuing to talk with the HD-DVD Group over this issue. And so the general point on the Play Station 3, at this point in time, and I cannot comment on these specifications such as the use of the current Blu-ray or anything like that.

Thank you very much, Mr. Yuhara. We'd also like to go to our next live question. Ashley, do we have another live question?

Not at this time, sir.

Okay. So let's go to our next e-mail question. Our next e-mail question is about PS2 and PSP forecast for -- our next question is we with respect to next generation Play Station, can you discuss approximately -- approximate launch timing and if third party publishers have received development kits?

Well, at this point in time, unfortunately I do not comment on the launch time. But the Sony Computer Entertainment team is looking at the best timing for the product launch, considering the hardware and the number software and also the manufacturing platform is available for the mass production.

Thank you very much, Mr. Yuhara. Next we have an e-mail question again. This question is about sales. Sales for this -- the current fiscal year FY '05. Your sales forecast for FY -- the financial year ending March 31, 2006, seems very aggressive plus 640 billion yen. If we make an apples to apples comparison, excluding music business sales, contributions for FY '04 your sales growth forecast is not plus 5 but rather plus 8. Why do you think this is achievable?

First of all, the sales growth anticipated is around 4%. It is not 5%. The impact of BMG is not great in this forecast. In terms of sales, the driving force is the game business – we have the full year effect of the Play Station Portable. And in the Electronics business, flat panel TVs and microdevice rear projection TVs are expected to grow this year.

Thank you very much Mr. Yuhara. Let's proceed to another e-mail question. Taking out the 60 billion of pension benefits in your 160 billion guidance, operating income will not grow this year, yet music, gaming, and financial services are all expected to be relatively flat while pictures margins fell a bit. Electronics seems to be the real culprit. What product categories in particular are causing problems and what can Sony do about this?

Yes, in the Electronics segment particularly, if you exclude the restructuring expenses in the fiscal year 2005, the operating profit level is almost the same level as fiscal year '04. And in fiscal year '04 (MEANT TO SAY 05) we have the positive effect of the restructuring initiatives to lower the fixed costs. We will also have sales growth, particularly in the display products, in fiscal year '05 which give us positive effect, but we have the yen appreciation and also the increase in expenses such as the depreciation charges and also R&D which would offset those positive effects, as I mentioned. If I look into the products category-wise, the TV business is increasing, particularly on the flat panel TVs. However, there is a risk that the sales increase will not directly lead to drastic profit improvement, so we are conservatively watching the business environment due to the severe competition among our competitors. Also, the video camcorders and also digital still cameras – their profitability will be deteriorating slightly caused by the yen appreciation anticipated in this year. As for the DVD recorders we are looking at the high end models which are the more added value and we are trying to make a product range rather than the current line up. The last is device and component – we are anticipating that outside sales doesn't move up for the first six months. In total, Electronics is almost the same level of profit before restructuring charges. And in the Pictures segment, although revenue is increasing we are anticipating the operating profit will decrease due to the lack of mega hits such as Spider-Man 2. And the Financial Services and Other segment will see a slight profit decrease compared to 04.

Thank you very much, Mr. Yuhara. With that, I would like to go over to a live call.

Your next question comes from the line of Mr. Matthew Troy from Smith Barney. Sir, your line is open. You may proceed.

Good evening, thank you for taking my call. Two-part question. One, could you please talk about the growth rates in the digital camera segment by region in the current quarter as well as your outlook for the full year by market and secondly could you provide some detail about Sony's digital camera outlook opportunity and strategy in the emerging Chinese market? Thank you.

Yes. And as you know, the digital still camera market is showing the increase of the quantity in the worldwide market and so we anticipate that the digital camera sales will increase in all areas, but in Japan where we will stay the same level as this years and also, as for products, we have launched the fully compact camera called the T7 in Japan and this is a strategic model and we would like to widely launch this model to the rest of the market.

Thank you very much for your question. With that we have -- do we have another live call Ashley?

Yes, sir. Hold one moment, please. Okay, sir. Your next question comes from the line of Edward Williams from Harris Nesbitt. Sir, your line is open. You may proceed with your question.

This is Tom Andrews standing in for Edward Williams today. Now, with respect to your Play Station 2 and Play Station Portable shipment forecast for the current fiscal year, could we get a geographic breakdown?

Well, first, I'd like to tell you about the current forecast: 12 million for PS2 and also 12 million for the Play Station Portable as well. But I cannot disclose the quantity on a geographic basis, but as you know the U.S. and Europe will be a big market. Thank you.

Okay.

Thank you very much for your question. Do we have any other live questions Ashley?

No, sir, not at this time.

If that is so, then I would like to conclude today's call. Thank you very much for joining us today. Thank you, Mr. Yuhara and Mr. Wiesenthal for joining us as well today. I'd like to take this opportunity to remind everyone of our investor relations contact information. In Tokyo investor relations can be reached at 813-5448-2180. New York investor relations can be reached at 212-813-6722. London investor relations can be reached at 44-207-449713. Again, thank you very much for joining us. That concludes today's call. Thank you very much.

This does conclude today's conference call. You may now disconnect.